European markets diverge on debt crisis concerns
(AP)

November 25, 2010

By

LONDON – Stock exchanges of countries at the forefront of investor concerns over Europe’s debt crisis closed lower Thursday, on a day when trading activity was light as Wall Street was closed for the Thanksgiving holiday.

The FTSE 100 index of leading British shares closed up 41.83 points, or 0.7 percent, at 5,698.93, while Germany’s DAX rose 55.86 points, or 0.8 percent, to 6,879.66. The CAC-40 in France ended 12.81 points, or 0.4 percent, lower at 3,760.42.

But those gains in Europe were mainly consigned to countries not considered to be at threat from bond market investors.

In Ireland, banking stocks continued to drop amid mounting expectations that they will be fully nationalized during the country’s impending bailout.

The Irish government confirmed last weekend that it was asking for a financial lifeline from its partners in Europe and the International Monetary Fund and on Wednesday outlined another euro15 billion worth of austerity measures in order to get the cash. However, it’s not going to be easy, as the political situation in the country remain turbulent.

On Tuesday, Ireland’s premier, Brian Cowen, bowed to the inevitable and confirmed that the country will be going to the polls early next year if the 2011 budget, scheduled for Dec. 7, is passed.

“Complicating matters further, the leading opposition party signaled that they will re-examine any IMF-EU deal, if they come to power in an early 2011 general election,” said Carl Campus, an analyst at BMO Capital Markets.

The bigger worry in the markets, though, is whether the debt crisis, which also has seen Greece get its own euro110 billion bailout, will claim any more casualties.

Investors are getting twitchy that Portugal, or more dangerously, Spain will be next, hence the under performance of their stock markets Thursday.

“Reports are beginning to surface that Spain may be next, ahead of Portugal, when it comes to a market focal point,” said Will Hedden, sales trader at IG Index.

The prevailing view in the markets is that Europe may be able to support Portugal but that a bailout of Spain would be one step too far and that the euro project itself could be in jeopardy. Spain accounts for around 10 percent of the eurozone economy, in contrast with the other three countries, which account for around 2 percent each.

Those worries remained evident in the bond markets. The yield on Spain’s 10-year bonds was up another 0.1 percent at 5.17 percent, while Portugal’s was steady at 7 percent.

While the exchanges in the so-called peripheral countries were depressed, Europe’s major indexes in London, Frankfurt and Paris continued to rally following Wall Street’s strong close Wednesday following generally upbeat U.S. economic data — not least the news that weekly jobless claims fell last week to their lowest level since July 2008.

The U.S. data stoked hopes that the economy actually may be picking up pace and that the overall unemployment rate — a key concern for both the Obama administration and the Federal Reserve — could be heading downward soon.

Getting the unemployment rate down from near 10 percent is one of the main reasons why the Fed decided earlier this month to pump another $600 billion into the U.S. economy over the coming months. Preventing prices from actually falling is the other key tenet of the controversial policy.

The euro failed to garner as much support from the improvement in risk appetite it would normally get, given the concerns about Ireland, Portugal and Spain.

A rise in risk appetite would normally give the euro a boost against the dollar. When investors have a greater interest in riskier investments, stocks usually get a boost, while the dollar loses some of its safe haven shine.

By late afternoon London time, the euro was up 0.3 percent on the day at $1.3365.

That’s a healthy rebound from Wednesday’s two-month low of $1.3282, but the single currency remains five cents down from Monday’s peak of $1.3786.